Affiliate coal sales draw renewed scrutiny

An unfolding court case might change how Powder River Basin coal is taxed in Montana. Last week, a Montana district court heard oral arguments in a lawsuit pitting Cloud Peak Energy against the state.

The state is asking for $3.4 million in back taxes, arguing that Cloud Peak underpaid between 2005 and 2007 by selling to an affiliated company at below-market value.

This isn't the first time this year that Cloud Peak has faced scrutiny over its tax practices. Earlier this year, a Reuters investigation revealed that coal companies were potentially dodging higher federal taxes by selling to affiliates at domestic prices, and then reselling the coal abroad for up to ten times as much.

While this case is unrelated, it addresses the same fundamental question: where in the sales process should taxes be calculated? Cloud Peak says they should be based on prices negotiated in contracts, while Montana says they should be calculated in comparison to third-party sales prices, whether those sales happen in Milwaukee or Seoul.

“The sale is ultimately to the purchaser, and the purchaser is defined as the ultimate user of the coal,” says Lee Baerlocher, the Bureau Chief for the Montana Department of Revenue.

Whether that holds up to legal scrutiny will be decided by the judge in the next few months. At the federal level, the Department of the Interior has yet to issue new guidelines for sales to affiliates.